How will you reduce Paypal's operating costs by 50%?

1. Clarifying questions -
   1. So I am like the CEO of Paypal trying to figure out this? yes
   2. Is there any goal on why we want to do this? Is the business not performing well? yes u can assume that
   3. Any specifc geo to consider? u can choose
2. So lets talk about Paypal for a minute, strengths, weakness. Key operating costs and then we come up with a criteria to reduce expenses and finally come up with a recommendation.
3. Paypal is leading fintech in the world that has the mission to make sending, receiving money simple, personalized and secure. It operates in P2P payments space as well as enables businesses to streamline their transactions e.g. ecomm transactions by acting as payment gateway and payment processor.
   1. Strengths
      1. Mature tech stack for payment gateway, secure transactions - fraud detection,
      2. Trusted and streamlined payment experience popular at merchant outlets as well as with customers.
   2. Weakness
      1. Too focused on payments where as the new fintech are providing a more wholesome experience including credit solutions, wealth management solutions along with payments.
4. Below are some of the key operating expenses of Paypal in my opinion-
   1. Recurring cloud provider subscription fees to host its servers across the world
      1. Shift to cheaper cloud provider
         1. Large contribution, impact on brand - no,cost to implement - high
   2. Employee salaries
      1. Go for leaner teams
         1. Large contribution, impact on brand - high, cost to implement - med
   3. Facility lease costs
   4. card network charges to perform card transactions
   5. customer service charges
      1. Go for automated customer support with the use of AI agents
         1. Contribution - large, impact. on brand - low, cost to implement - high.
5. Criteria to evaluate - contribution of the charge in the total operating cost, min. impact on brand, cost to implement
   1. I'll go for option a and e. since with increased use of AI I'll need more compute power and thus cheap cloud service provider will be required.
6. Trade off -
   1. We need to evaluate the performance, reliability of the cloud service provider before we plan this shift so that won't lead to bad customer experience.
   2. Similarly for customer service.
   3. Thus we should start with small pilots and once pilot is successful should proceed with incremental roll outs.

Here's my nine step proecss for answering this Facebook product strategy question:

1. CLARIFY: 
   1. Is it OK to focus on PayPal alone (v. Venmo, etc.)? Yes.
   2. Is there a specific reason as to why we want to reduce PayPal's operating costs? Was there some big event or revenue impacts I should know about? Assume operating at a deficit. Want to improve profits. 
   3. Is there a specific region I should focus on or is it all? You choose.
2. PAYPAL BACKGROUND: PayPal is a payment company that offers servicees to send and receive payments online. It operates in both the personal payments space, offering peer to peer payments for example, and the business space where it enables thousands of eCommerce marketplaces to make transactions. It acts as both a payment gateway and a payment processor. PayPal also owns Venmo, another peer to peer payment method.
3. OPEX EXPENSES: Operating expenses are expenses a business incurs through business operations, including rent, equipment, inventory, marketing, payroll, insurance, step costs and research and development costs. 
4. WAYS TO REDUCE OPEX: 
   1. Rent: Reduce the office space rented. Move to a rotational office space model or mainly virtual workplace. With COVID, most businesses are virtual, so the need for physical space is much less.
   2. Equipment: Review equipment purchases: both technical and non technical and streamline those expenses. Perhaps there is a surplus of employee laptops purchased. If there are any unnecessary equipment purchases (like new sofas, desks, etc.) cancel.
   3. Suppliers: Review suppliers and cut any that are not needed. Look where PayPal can optimize spend. Cut redundant suppliers. Choose a cheaper supplier, etc. 
   4. Dynamic Discounting: Often small suppliers are in need of cash flow. There are dynamic discounting tools (ex. Taulia, American Express Early Pay) that offer buyer's discounts for faster payments to supplier. Offer to pay expenses early for discounted rates from suppliers. 
   5. Marketing / Advertising: Review campaigns and cut any that are not bringing in significant revenue. Analyze which campaigns have highest success rate / why. Cut campaigns that are less successful or change them to increase profits.
   6. Payroll: Review workforce and determine if the organization needs to be streamlined. Cut any underperforming or unnecessary job functions. Focus on promoting internally which tends to be cheaper than external.  Could also review bonuses / annual salary increases and see where cuts can be made.
   7. Benefits: Cut unnnecessary employee benefits (though likely to face a lot of backlash). 
   8. Office Perks: Cut unnecessary office perks - like free lunch, etc.
   9. R&D: Review R&D budget and cut any projects that do not seem necessary or are less of an immediate priority. Any high in the sky projects that may take significant resource cost / have high risk should be cut. 
5. EVALUATE MEASURES:

   1. Reduction Method	Impact to Opex
      Rent	High
      Equipment	Medium
      Suppliers	High
      Dynamic Discounting	Low
      Marketing / Advertising	Medium
      Payroll	High
      Benefits	High
      Office Perks	Low
      R&D	Medium

6. RECOMMENDATION: I'd prioritize the methods will high impacts to Opex and then move to the medium measures until I got to 50%. If needed, I'd continue to the low methods as well. 50% Opex cut is very large, so likely I'd need a combination of all measures listed. If I still had a surplus, I'd revisit my budget and see where there are additional measures needed. 

 

 

Goal is to reduce the OpEx by 50%.

OpEx--> (1) Fixed Costs (2) Variable costs

1) Fixed Cost--> IT infrastructure--> Where is it hosted? on premise? Cloud? If on premise, any cost decrese if hosted on cloud?

2) Variable Cost--> (2a) Salaries (2b) 3rd party transaction costs (2c) Advertisements

(2a) Salaries--> Automate some of the tasks and cut some of the redudencies?--> How much to invest to automate some of the tasks? what is the $$ benfit? Check if this option is feasible.

(2b) 3rd party transaction costs: Leverage the market leader position and negotiate with the 3rd party (such as Visa, Amex, banks etc.,) to reduce the transaction costs.

(2c) Advertisements-->How much is the spend? What is the elasticity? (% decrease in Revenue for % decrease in spend in advertisements). How much of the Revenue are we willing to forgo if we decrease spend in this area.

I would compile each of the benefits ($$) for each of the above areas and see the trade offs/opportunities.